Why oil and pelf don’t mix

Why oil and pelf don’t mix
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First Published: Thu, Jun 26 2008. 10 54 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Thu, Jun 26 2008. 10 54 PM IST
There’s something remarkable about it. The world over, politicians seem to think alike: Their list of villains and what to do in crises has a certain consistency, if not constancy. Thus, in the age of expensive oil, can it be any different for politicians in the biggest democracy and the most populous one?
Illustration: Jayachandran / Mint
First, who’s to blame? US presidential hopeful Barack Obama and India’s “Left” (a much abused term as it is routinely confused with the views of other populist politicians in the country) believe it’s evil oil companies that are to be blamed for high prices and fleecing people.
Two, what’s to be done? Impose a “windfall gains” tax on private oil companies. Why? Governments get more revenue (which will be spent on the “people”) and the companies can afford to part with this money (remember, they got oil fields, the source of crude oil, when crude prices were around $20-30 a barrel compared with the $130 these days). Of course, it makes eminent political sense to show that public representatives are doing something to tame wild prices (and, dare we say, wild oil companies?).
The problem is the reasoning is based on dodgy facts and poor economics. First, most private refiners in India service overseas markets and have negligible presence in the retail petroleum market. Many of these players had set up a network of petrol pumps across India. Today, they have been shut down. Two, what consumers buy in the retail market is subsidized pretty stiffly by the government. Output from private refineries is not subsidized and, in any case, they cannot compete in a market where the government administers prices of petrol and diesel. The combination of custom and excise duties and sales tax (which comprise 53% of the final price of petrol, and 34% in the case of diesel) would price them out from this market. In fact, their earnings in overseas markets bring wealth to the country.
The problem lies elsewhere: the effort to keep oil prices low leading to ever higher prices. Demand and supply dictate that when prices rise beyond a point, people will begin consuming less and prices will fall. This is not being allowed to take place. In addition, in a bid to make life “easy” for the common man, state governments have cut sales taxes and sundry other duties. This only fuels more consumption, driving prices higher. Private companies have nothing to do with this situation. Politicians have everything to do with. They should think about it.
Why do politicians love to blame oil companies? Write to us at views@livemint.com
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First Published: Thu, Jun 26 2008. 10 54 PM IST
More Topics: Ourviews | Oil | Democracy | Barack Obama | Views |